Your success as a business owner comes down to whether you can pay your bills and still turn a profit. That may seem obvious — and yet achieving a healthy balance between monetary intake and output is an art that confounds many entrepreneurs.
It is no exaggeration to say that your ability to manage cash flow can make or break a business. Otherwise-successful business owners have crumbled under the stress of poorly managed cash flow. Likewise, owners have flourished under a well-structured, well-maintained accounting system.
Fortunately, it’s not necessarily difficult to stay on top of the money coming into and going out of your company. Here are some practical insights:
Assume that your estimates are wrong — and save for a rainy day. No matter how carefully you plan for all potential cash-related scenarios, you can never accurately predict the weather of your operating environment. At any moment, a storm front or even an unexpected sunny day could appear out of nowhere.
It’s a good idea to make rough estimates for your cash flow. Just be sure to give yourself a healthy margin for error and expect the unexpected. Keep a nice cushion of money in your account for surprise bills. Yes, entrepreneurship is based on taking risks, but where cash flow is concerned, err on the side of conservatism. Remember: Cash is king. Cash flow determines what you are able to do with your business.
Don’t underestimate the value of a good customer. You have the choice to run your business as you see fit, but no matter how successful and powerful you become, remember that your customers are the reason you exist. The loss of a steady customer means loss of reliable income that can be very difficult to replace.
So be good to customers. One company may spend thousands or tens of thousands of dollars on your services over the years. If you’re a consumer company, even one homeowner person can be worth thousands of dollars over the span of your business relationship. Never let success change your mission of giving all customers the royal treatment. They are the source of cash that you need to pay rent, taxes and other expenses, and provide a healthy profit.
Keep tabs on your expenses. Don’t rely on your memory to know when to pay your bills, order new supplies or bill your clients. Even if you run a very small business, you won’t be able to pay everything on time if you don’t have a system in place to help you keep track.
Choose some reliable method to help you track your bills and their due dates. Your system can be as simple as a notebook where you document when to write checks and when to deposit funds that come in. Far better, use computerized accounting software. Being well organized will ensure that your supplies are always in stock, your power never goes out, your employees get paid, and you make money.
Be firm but kind with clients. It is important to run your business in a manner that tolerates a certain amount of leniency — but don’t let customers walk all over you. If you establish yourself as a pushover, even clients with the best intentions will take advantage of you.
On the other hand, you don’t need to run your company with an iron fist. Find a happy medium that keeps you in business and keeps your clients happy. Don’t be afraid to politely call a customer who hasn’t paid a bill and remind him or her that it is overdue. They understand that you have provided a service and that it requires a payment. You can preserve your client relationship and get your money by treating customers with integrity.
At the bare minimum, break even. You have to at least break even each month in order to survive. In hard times, strive to break even — and then get back on track. Engrave your break-even number in your mind or sticky-note it to the front of your computer, and see that you surpass that number each month — by a healthy margin in all but the toughest times.
Here’s a quick tip: If you are having problems breaking even, and if that means you may be late in paying vendors, let them know. Don’t keep them in the dark. No one likes surprises, especially your bank.
Be honest with the man. Never try to improve cash flow by cheating the taxman. Some (supposedly) clever people have filtered out money from their business and kept it out of the government’s grasp — but usually only for a while.
You may get away with hiding money, under-reporting income, or fudging your write-offs, but the odds are against you. Uncle Sam has gone to great lengths to set up systems that keep this from happening easily. In general, the rewards of cheating do not justify the risks.
Why taxes are good — really! Many businesses try to show a very small profit at year’s end so they can cut their tax liability. But if you keep your business account so low that you don’t have enough cushion to pay an unexpected bill, cash flow is damaged.
Instead of taking tax avoidance to extremes, get out there and try to make more money. If you think about taxes in the right way, you won’t view them as such a bad thing. In the end, paying more taxes is a sign that you are doing very well.
Keep away from credit cards if possible. Credit cards are necessary, but that doesn’t mean that you should run up a mountain of debt. Businesses shut down because of factors like credit card debt, so swipe with caution if you have to swipe at all. Don’t max them out, by any means. If you find that you have to max out a credit card, your business may already be in trouble and it is time to seek alternate funding.
Don’t worry if managing your cash flow seems difficult and even overwhelming at first. After a few months, you will embrace your monthly monetary obligations. You may even find a sense of comfort in the ebb and flow of money. Like the tides and the seasons, cash flow has a natural rhythm that keeps you grounded and helps you make sense of your place in the business world.
Before you know it, you will use cash flow as a gauge of your ability to take risks. That knowledge will help you make the kinds of smart decisions that help your company grow and flourish.
